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Trouble in pipeline for oil minnows

Trouble in pipeline for oil minnows
Next year is expected to bring another period of uncertainty for smaller oil and gas firms operating in the UK North Sea.

Next year is expected to bring another period of uncertainty for smaller oil and gas firms operating in the UK North Sea.

There will undoubtedly be casualties and acquisitions, according to Ernst and Young.

Alec Carstairs, Aberdeen-based oil and gas partner at the professional services firm, said yesterday: “The credit crunch, fears of global recession and the resulting falls in commodity prices have combined to create an unprecedented flight from perceived risk, as investors dash for cash and safer havens.

“Many institutional investors have decided to withdraw from the sector altogether, which is driving share prices downwards.

“A number of junior oil and gas companies are finding it increasingly challenging to secure funding from investors. Without cash, a company cannot progress from exploration to development and production.

“Junior exploration companies, historically reliant on capital markets to fund their capital-intensive growth, face the very real prospect that they will not be able to secure the funding needed to finance ongoing operating costs, let alone their growth plans.

“But of more immediate urgency is the possibility that pure exploration companies will not have enough working capital simply to continue operating.

“We have already seen a number of companies beginning to warn on their ability to continue as a going concern.

“Declining asset valuations and high costs are making decisions more difficult.

“The ability to secure either equity or debt financing is no longer a given and in many cases a non-starter.”

“With share prices and market values on a downward trajectory, more transaction activity in the sector in 2009 is inevitable. Juniors in a robust enough financial position to execute a deal will seek to acquire through consolidation.

“The current market turmoil will open up new acquisition opportunities for the cash-rich players: supermajors, national oil companies and sovereign wealth funds. Nevertheless, deal financing and execution remain a challenge in the current climate, even for the majors.

“All oil and gas juniors should look at their cash flow and take action.

“This may mean bringing forward negotiations with the banks for future funding, or it may mean seeking a partner before it is too late.

“Despite the uncertain landscape there will still be opportunities. Although oil prices have fallen sharply, they remain above long-term averages. Crucially, the industry as a whole is in a stronger shape than in previous downturns and is better placed to deal with the challenges ahead.”

Oil and gas consultancy Hannon Westwood said less than two weeks ago that having up to 160 companies active in the North Sea was inherently unstable, and a long-overdue rationalisation among smaller oil and gas firms was on the way.

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